Taxaudit Check List

8/8/2019 Taxaudit Check List

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Clause Clauses under Form 3CD Step recommended WP Ref By

apparent change in thebusiness carried out bythe assessee, which may

need to be highlightedunder this clause. Inparticular, examinewhether any business oractivity has beendiscontinued, any newactivity has beencommenced or whetherthere has been anyexpansion of the existingbusiness.

Additional activity started

with in the same businesscarried on by theassessee does not meanchange in nature of business or profession e.g.if the assessee is in thebusiness of manufacturingshirts also startsmanufacture of trousers.

Obtain managementrepresentation.

For change in businessbesides LOR go through

the following : Any notes given in

Notes to Accounts. Any notes given by

Board of Directors intheir report.

Compare theSegment Reporting ofthis year with last year.

Compare quantitativedetails of this year withlast year.

9 (a) Whether books of accountare prescribed undersection 44AA, if yes, list ofbooks so prescribed.

: Applicable for assesseecarrying profession for thetime being.

(b) Books of accountmaintained.(In case books of accountare maintained in acomputer system, mentionthe books of accountgenerated by such

computer system)

: Check complete list of allprimary books of accountsmaintained by theassessee.

Check whether books ofaccounts have beengenerated from computer

system or not. Obtain management

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representation.

(c) List of books of account

examined.

: Disclose the list of books of

account examined.

10

Whether the profit and lossaccount includes anyprofits and gainsassessable on presumptivebasis, if yes, indicate theamount and the relevantsection (44AD, 44AE, 44AF,44B, 44BB, 44BBA, 44BBBor any other relevantsection).

: Generally Not applicable.However go through theconsolidated Profit & Lossaccount to see whether itincludes any such profit.

11

(a) Method of accountingemployed in the previousyear.

: Review Accountingpolicies from auditedaccounts. Check whetherassessee is followingMercantile or Cashmethod of accounting.

While followingMercantile basis ofaccounting, checkwhether any item ofincome or expense isaccounted for on cash

basis. Since Hybridmethod of accounting isnot allowed, state thenature and amounts ofsuch items.

(b) Whether there has beenany change in the methodof accounting employedvis-a-vis the methodemployed in theimmediately precedingprevious year.

: Scrutinize the last week oflast months journalvouchers thoroughly tosee provisions forexpenses made &whether they are on samebasis as in earlier year.

Payment vouchers for firsttwo months of subsequentyear should be scrutinizedto verify the correctnessthereof.

Ensure that followingheads of accounts arescrutinized thoroughlyand compared with earlieryear to check whetheraccounting is on samebasis as in earlier years.;

Refund for income-tax, sales tax, etc. Export incentives

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Claims for loss ordamage

Grants/Subsidies

Interest on delayedpayments

Determine whether therehas been any change inthe method of accountingemployed vis--vis themethod employed in theimmediately precedingyear.

(c) If answer to (b) above is inthe affirmative, give

details of such change,and the effect thereof onthe profit or loss.

: Ensure that any change inthe method of accounting

employed is appropriatelydisclosed and the effectthereof on the profit/lossis also disclosed.


(d) Details of deviation, if any,in the method of accounting employed inthe previous year fromaccounting standardsprescribed under section

145 and the effect thereofon the profit or loss.

: Check whether there isany deviation from theAccounting Standard (IT) I & AccountingStandard (IT) II notifiedunder section 145(2) of

IT Act regarding;a) Fundamental

accountingassumption of Accrual, Consistency& Going Concern.

b) Prudence, Substanceover form &Materiality inaccounting policies.

c) Disclosure of significant accounting

policies and changesin such policies withthe resultant impact,if material onaccounts of year ofchange orsubsequent year.

d) Disclosure of priorperiod andextraordinary itemsor change inaccounting estimatein Profit & Loss

Account and reportthe effect thereof onprofit & loss.

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Ensure that deviationfrom such standards isappropriately disclosed

and the effect thereof onthe profit/loss is alsoindicated.

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(a) Method of valuation of closing stock employed inthe previous year.

: Closing stock wouldinclude raw material,finished goods, work inprogress, stores, spareand loose tools andshares/units in case ofinvestment companies..

Change in the method of

valuation of opening andclosing stock, includingeffect of change, is nowcovered under clause 11.

Agree the method ofvaluation with auditedworking papers andaudited financialstatements.

(b) Details of deviation, if any,from the method of valuation prescribed under

section 145A, and theeffect thereof on the profitor loss.

: Deviation normally occurs incase of stock of RawMaterial, Stores, WIP etc.

only and in case of finishedgoods to the extent of costof raw material etc.comprised therein which arevalued net of VAT. Althoughthere may not be any impactdue of Cenvat and VAT.Give appropriatenote/working (existing noteif any needs amendment).

12

A Give the followingparticulars of the capital

asset converted into stock-in-trade:-

Verify any fixed assetconverted into stock in

trade. Give the necessarydetails.

(a) Description of capitalasset;(b) Date of acquisition;(c) Cost of acquisition;(d) Amount at which the

asset is converted intostock-in-trade

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Amounts not credited tothe profit and loss account,

being -

:

(a) The items fallingwithin the scope of

: Enquire whether any itemof income chargeable

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section 28; under Profit and Gains of Business of Professionhas not been credited to

the profit and lossaccount. Section 28covers :

- Profits and gains ofbusiness orprofession

- Compensationreceived ontermination of employment, agency,etc.

- Income of trade orprofessional orsimilar associationfrom specific servicesto members

- Export incentives- Perquisites received

during the course ofbusiness

- Interest, salary,bonus, remuneration,etc. received by apartner from firm,which is allowable

under section 40B.- Amount receivedunder key mansinsurance policy

Thus, if any such item istaken to any accountdirectly in the BalanceSheet, it will be coveredunder this clause.

Review the auditedschedules and financialstatements to determinewhether such income has

been credited directly toreserves or retained as acredit under the head`current liabilities andprovisions or any otherhead.


(b) The proforma credits,drawbacks, refunds ofduty of customs orexcise, or service tax,or refund of sales taxor value added taxwhere such credits,

: Obtain a scheduleindicating the details ofthe following claimsadmitted as due by the

concerned authoritiesbut not credited to theprofit and loss account.

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drawbacks or refundsare admitted as dueby the authorities

concerned;

The schedule should alsoindicate the year in whichit was admitted as due.

- Proforma credits- Duty drawbacks- Excise/Custom duty

refunds- Sales tax refunds- Service tax refunds- VAT refunds

Obtain an understandingof the relevant accountingpolicies [refer clause11(a)].

Agree the schedule with

the claim papers andrelevant correspondencefiles. Further ensure thatthe claims have beenadmitted as due by theconcerned authorities.

Review the relevantassessment orders todetermine whether anysuch claims are due.


(c) Escalation claimsaccepted during theprevious year;

: Obtain a scheduleindicating details ofescalation claimsaccepted during the yearbut not credited to theprofit and loss account.The schedule should alsoindicate the year in whichit was accepted as due.Certain instances ofescalation claims may bein relation of contract withgovernment customersand other sales tocustomers havingescalation clause incontracts.

Obtain an understandingof the relevant accountingpolicies [refer clause11(a)].

Agree the claims acceptedwith contracts and otherrelevant documents andensure that claims have

been accepted by theconcerned authorities.

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(d) Any other item ofincome;

: Enquire whether any itemof income chargeable totax under heads of income other than `Profitsand Gains of Business orProfession has not beencredited to profit and lossaccount.

Report all items of incomewhich are credited toexpense heads with anote that this has no

impact on the net profit. Review the audited

schedules and financialstatements to determinewhether such income hasbeen credited directly toreserves or retained as acredit under the head`current liabilities andprovisions or any otherhead.


(e) capital receipt, if any. : Enquire whether anycapital receipt ha s notbeen credited to profitand loss account. Forinstance, capital receiptsmay be in the nature ofgrants/subsidies,

Note: In case of non-compete fees directlytaken to reserves orcapital account reportthe same in clause13(a) also.

Furnish details of giftsreceived during the year.

Share premium account.

Share forfeiture. Capital reserve arising on

merger and demerger. Furnish details of the

amount of capital naturereceived or receivable ontransfer of technology,knowhow, and patent

during the financial yearand treatment thereof in

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accounts.

Obtain an understandingof the relevant accounting

policies [refer clause11(a)].

Review the auditedschedules and financialstatements to determinewhether such capitalreceipt has been crediteddirectly to reserves orretained as a credit underthe head `currentliabilities and provisionsor any other hand.


14

(a)

(b)(c)

(d)

(e)(f)

Particulars of depreciationallowable as per theIncome-tax Act,1961 inrespect of each asset orblock of assets, as thecase may be, in thefollowing form :-Description of asset/blockof assetsRate of depreciation.

Actual cost or written downvalue, as the case may be.Additions/deductionsduring the year with dates;in the case of any additionof an asset, date put touse; including adjustmentson account of-(i) Modified Value

Added Tax creditclaimed andallowed under theCentral Excise

Rules, 1944, inrespect of assetsacquired on or after1st March, 1994,

(ii) Change in rate of exchange of currency, and

(iii) Subsidy or grant orreimbursement, bywhatever namecalled.

Depreciation allowable.Written down value at theend of the year.

: Obtain a scheduleproviding the relevantdetails indicated in theaforesaid clause inrespect of each asset orblock of assets. Inparticular, ensure that thefollowing have beenincluded :

- Written down value

at the beginning ofthe year.

- Assets acquiredduring the year havebeen segregatedbetween the assetsput to use for lessthan 180 days andthose used for morethan 180 days

- Deductions duringthe year representthe sale proceeds of

assets sold- Rates of depreciation.

(i) ReferAppendix 1 andAppendix 1A asthe case may be.

(ii) Appendix 1Ais applicable inrespect of PowerGenerationcompanies.

- Even in a case where

the auditee hasdecided not to claimdepreciation in part

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or full, give fulldetails of depreciation

allowable. Review assessments

completed/ prior year taxreturns to examine thebasis adopted in earlieryears for determination ofdepreciation allowable.Also ascertain whetherany aggressive positionshave been adopted by theclinet and examineimplications thereof.

For additions during theyear ensure that theclassification of assets orblock of assets and therates of depreciation is inaccordance with therequirements of theIncome Tax Act, 1961.

Agree the written downvalue at the beginning ofthe year to the return ofincome of theimmediately proceding

year. Agree the additions with

the audited schedules andensure that adequatetests have been carriedout for `actual costcapitalized and the datesthe assets were `put touse. Obtain areconciliation to theadditions as per theaudited schedules, wherenecessary. Certain

instances of suchreconciling items may becapital expenditure onscientific research,leasehold improvements,etc.

Ensure that the policiesfollowed are consistentwith the requirements ofthe Income Tax Act, 1961.

For assets acquired duringthe year, obtain an

understanding of theaccounting policy for thefollowing :

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- Modvat credit- Exchange fluctuation

including in respect

of realized gains/losses, unrealizedgain/losses andtreatment of forwardexchange contracts.

- Subsidy or grant orreimbursement.

Depreciation capitalized. Any expenditure which

does not relate toacquisition of P&M butcapitalized as part of

preoperative expense. Ensure capitalisation of

interest in respect ofborrowed capital as perSection 36(1)(iii).

Agree the amountsincluded as adjustmentson account of modvat,change in exchange ratesand subsidy/grant withthe audited schedules andother relevant supportingdocuments.

Check the implications ofsection 43A of Income TaxAct.

Agree the deductionsduring the year withaudited schedules andensure that such amountreconciles with theamount considered fordetermining the profit/losson assets sold, discardedetc.

Review the depreciationcomputation and ensurethe arithmetical accuracyof the depreciationallowable and the writtendown value at the end ofthe year.

Ensure that additionaldepreciation u/s 32(ii)(a)is compiled and reducedfrom WDV.

1

5

Amounts admissible under

sections-(a) 33AB

: Obtain a schedule giving

details of deductionadmissible under the

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(b) 33ABA(c) 33AC (wherever

applicable)

(d) 35(e) 35ABB(f) 35AC(g) 35CCA(h) 35CCB(i) 35D(j) 35DD(k) 35DDA(l) 35E

(a) Debited to the profitand loss account(showing the amountdebited and deductionallowable under eachsection separately);

(b) not debited to theprofit and lossaccount.

:

:

relevant sections,indicating separately, theamounts debited to profit

and loss account and notdebited to profit and lossaccount. The relevantsections are as follows:

- 35 Expenditure onscientificresearch

- 35CCA Expenditure byway of payment toassociations andinstitutions for carryingout rural developmentprogrammes.

- 35CCB Expenditure byway of payment toassociations andinstitutions carrying outprogrammes of conversa-tion of natureresources.

- 35D Amotisation ofcertain preliminaryexpenses.

- 35DD- 35DDA

Review the computationof the amounts admissibleunder the aforesaidsections and agree thesame with the auditedschedules, financialstatements and otherrelevant supportingdocuments.


1

6

(a) Any sum paid to an

employee as bonus orcommission for servicesrendered, where such sumwas otherwise payable tohim as profits or dividend[Section 36(1)(ii)].

: Furnish details of bonus or

commission, if any, to anemployee for servicesrendered which otherwisewas payable as profits ordividend.

Normal bonus orcommission to employeesincluding directors evenas percentage of profits isnot covered under thissub-clause unless thesame was otherwise

payable as profits ordividend.

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(b) Any sum received fromemployees towardscontributions to any

provident fund orsuperannuation fund orany other fund mentionedin section 2(24)(x) and duedate for payment and theactual date of payment tothe concerned authoritiesunder section 36(1)(va).

: Furnish details of any sumreceived from theemployees towards the

contribution to:a) Provident Fundb) ESI Fundc) Superannuation Fundd) Any other fund for the

welfare of employees.

Furnish details of due dateof payment and actualdates of payment for theamount received fromemployees towardsvarious funds stated in

above para. The due date of PF

Contribution is 15 daysand in case of ESIContribution is 21 daysfrom the end of the monthto which salary relates.

Refer to Circular No.E128(I) 60- III dated19.03.1964 as modifiedby circular E11/128/73dated 24.10.73 issued bythe concerned authorities

granting 5 days of graceperiod for payment forpayment of PFContribution . The duedate will be determinedaccordingly.

17

Amounts debited to theprofit and loss account,being :-

:

(a) expenditure of capitalnature;

: Furnish detail of followingexpenditure debited toProfit & Loss Account:a) Capital Expenditure;b) Capital Items which

are fully or partlywritten off in P&LAccount;

c) Scientific ResearchExpenses & TechnicalKnow How Fees;

d) Write of advance paidfor capitalexpenditure/ capitalproject.

e) Fees or Expenditureconnected withincrease in authorised

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capital, issue of bonusshares, travelling &other expenses

connected withpurchase of capitalassets etc.

f) Amount debited onaccount of preliminaryexpenses (35D), VRSexpenses (35DDA),Merger/Demergerexpenses (35DD).

Check the following headof accounts minutely:a) Store & spare parts

consumedb) Repair &Maintenance

c) Misc. Expensesd) Legal & Professional

If in your opinion, anyitem of expendituredebited to the P&LAccount is not of capitalnature but there ispossibility of holding sucha view, furnish detailswith your views on the

same. Obtain an understanding

of the capitalization policyfollowed by the client.

If any amount reported ascapital expenditure is inthe nature of fixed assetitem include the same inclause No.14.

Obtain managementrepresentation letter.

(b) expenditure of personalnature;

: Under section 227(1A)(c)of the Companies Act,1956, the auditor isrequired to enquirewhether personalexpenses have beencharged to the revenueaccount. If there is anysuch comment in theauditors statutory reportthen obtain a schedule ofpersonal expensesdebited to the profit and

loss account. In case of expenditure

incurred at club the same

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are to be reported underclause 17(d). However tothe extent of personal

element in the saidexpenditure, the sameshould be reported herealso.

Expenses of personalnature paid under acontractual obligationneed not be disclosed.

Agree with the auditedschedules supporting thecomments in the auditorsstatutory report.

Review the relevantaccounts to ensure thatno other expenditure ofpersonal nature has beencharged to the profit andloss account.


(c) expenditure onadvertisement in anysouvenir, brochure,tract, pamphlet or the

like, published by apolitical party;

: Furnish details of theexpenses incurred onadvertisement if anypublished for a political

party Furnish details of

expenditure incurred onadvertisement insouvenir, brochure, tract,pamphlet or journalpublished by trade union,labour union or any otherbody formed by politicalparty.

Agree the schedule withthe relevant supporting

documents.Note : Political parties wouldinclude both national andregional parties, which areapproved by the ElectionCommission. Review the

advertisement, salespromotion and otherrelevant accounts toensure that all suchexpenditure has beenappropriately disclosed.


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(d) expenditure incurred atclubs -

:

(i) as entrancefees andsubscriptions;

(ii) as cost for clubservices andfacilities used;

Furnish the detail ofexpenses made to clubsunder following heads:

- Entrance fees- Subscriptions- Catering Bills- Residential

AccommodationCharges

- Expenditure towardsuse of club servicesand facilities i.e.

health club. Bar.Conference &entertainmentexpenses etc.

Reimbursement of clubpayments todirectors/employeesshould be included in theabove statement.

Subscriptions and otherpayments made to serviceorganizations like LionsClub, Rotary Club, Giants,

Jaycees etc. would not beincluded under thisclause.

Payments made to creditagencies like Diners Clubwould not be includedunder this clause.

Payments to clubs wouldinclude payments toGymkhanas.

Review the relevantaccounts and ensure thatall expenditure incurred atclubs has beenappropriately disclosed.


(e) (i) expenditure byway of penalty orfine for violation ofany law for thetime being in force;

(ii) any otherpenalty or fine;

(iii) expenditureincurred for anypurpose which is

: Furnish the detail ofexpenditure by way ofpenalty or fine debitedduring the financial year.

Furnish detail of compensation debited forbreach of contract during

the financial year. Furnish copies of penalty

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an offence or whichis prohibited by law;

orders passed during thefinancial year underrelevant laws, which are

applicable to assessee. Furnish detail of gifts

given to governmentofficials.

Furnish details of expenditure incurred suchas protection money,extortion money, regularhafta, bribe etc.

Furnish detail of penaltydebited which are in thenature of interest under

any statue. Review the legal and

professional fees, ratesand taxes, sales tax paidor any other taxes paid,general charges accountand other relevantaccounts and ensure thatall such expenditure hasbeen appropriatelydisclosed.


Unsupported expendituremay need to be reviewedto determine whether itneeds to be includedunder `expenditure, whichis an offence or prohibitedby law.

(f) amounts inadmissibleunder section 40(a);

: Furnish detail of Interest,royalty, fees for technicalknow how, services andother sums, which are

payable outside India, onwhich tax has not beenpaid or deducted ordeducted and paid at rateless than the prescribedrate.

Furnish detail of expensespayable asreimbursement of expenses outside India onwhich tax has not beendeducted or paid atsource.

Furnish details of payment, which is

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chargeable under thehead salaries payableoutside India and on

which Tax has not beendeducted.

Furnish any interest,commission, brokerage,fees for professionalservices or for technicalservices, amountpaid/payable to contractorand rent, royalty on whichtax has not deducted ordeducted at rate less thanthe prescribed rate or

after deduction of TDS isnot deposited within thedue date (Ignore latedeposit of TDS cases if thesame is deposited by theend of financial year).[Section 194C, 194A,194H, 194I, 194J andsection 9(1)(vii) & 9(1)(vi)].

Furnish any paymentmade towards a providentfund or other fund

established for the benefitof employees for whichtax has not beendeducted at source.

Furnish any tax actuallypaid u/s 10(CC).

Furnish Fringe benefit tax(below the line or abovethe line).

Furnish Securitiestransaction tax if debitedto Profit & Loss account orif not debited to Profit &Loss Account.

In case STT component isadjusted in the cost ofinvestment/sale price thenappropriate amount shallalso be disclosed asamount not debited toProfit & Loss Account.

Furnish any amount paidon account of rate or taxlevied on profits (includingany tax paid on profit

outside India). Review all expenses

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payable and provision forexpenses for 43B & TDSdefault.

Furnish details of IncomeTax & Wealth Tax debitedto P&L Account during theyear.

Agree the details withaudited schedules andother relevant supportingdocuments.


(g) interest, salary,

bonus, commission orremunerationinadmissible undersection 40(b)/ 40(ba)and computationthereof;

: Applicable only for

partnership firms.

(h) (A) whether acertificate hasbeen obtainedfrom the assesseeregardingpayments relating

to any expenditurecovered undersection 40A(3) thatthe payments weremade by accountpayee chequesdrawn on a bank oraccount payeebank draft, as thecase may be,(Yes/No)

(B) amount

inadmissible undersection 40A(3),read with rule 6DD[with break-up ofinadmissibleamounts]

: Obtain a schedule of allpayments made in excessof Rs.20,000 made incash. If such paymentsare exempt under any ofthe clauses (a) to (l) of

Rule 6DD, indicate in theschedule. Ensure that theconditions for specificexemption under any ofthe clauses (a) to (l) ofRule 6DD are satisfied.Ensure that the scheduleindicates the computationof disallowance as persection 40A(3).

Payments exceedingRs.20,000 otherwise thanby Account payee chequeor draft will attract 100%disallowance.

Furnish details of Outstanding Expenses ofthe financial year forwhich payments are madein subsequent year at thetime in excess of Rs.20,000/- otherwise thanby a Account payeecheque/draft.

This should include

payments to staff by wayof salary, travel allowanceetc.

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Only revenue paymentswould be covered.Purchase of fixed assets

for which cash paymentsare made in excess ofRs.20,000 would not becovered.

Payment for purchase ofraw materials and stockswould be covered.

As per the ICAI, in case noproper evidence forverification of thepayments by Accountpayee cheque or draft is

available the reportshould comment that it isnot possible for us toverify whether thepayments in excesss ofRs.20,000 have beenmade otherwise than byAccount payee cheque orbank draft as thenecessary evidence is notin the possession of theassessee.

Review the payments in

the cash book andadjustments toadvances/deposits toensure that all cashpayments exceedingRs.20,000 have beenincluded in the schedule.

Obtain certificate fromauditee that all paymentsexceeding 20,000/- forexpenses if made bycheque/ draft are made byAccount payee cheque orAccount payee draft.

(i) provision for paymentof gratuity notallowable under section40A(7);

: Furnish a copy of theorder of the Commissionerof Income Tax grantingrecognition to the gratuityfund.

Furnish certificate that thecontribution made doesnot exceed permissiblelimit as per rules 103 &104 of Income Tax Rules.

Obtain a scheduleindicating the provision

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for payment of gratuitynot allowable undersection 40A(7)..

Agree the amountsprovided with the auditedschedules, financialstatements and otherrelevant supportingdocuments and ensurethat all such expenditurehs been appropriatelydisclosed.

Whether contributionshave been made toapproved gratuity fund,

review the copy of thetrust deed and rules.


Enquire whether CIT orRPFC has withdrawn theexemption during theyear.

Verify that the PF Trustrecognized by CIT is alsorecognized by PFauthorities.

(j) any sum paid by theassessee as anemployer notallowable under section40A(9);

: Obtain a scheduleindicating the sum paid bythe assessee as anemployer, not allowableunder section 40A(9) i.e.towards setting up orformation or contributionto any fund, trust,company, etc. other than ;

- Recognised providentfund

- Any PF for exemptionis withdrawn by CIT.

- Recognised gratuityfund

- Recognisedsuperannuation fund

- As required by orunder any other law.

Agree the details withaudited schedules andother relevant supportingdocuments.

Review the staff welfareand other relevant

accounts to ensure that allsuch sums not allowable

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under section 40A(9) havebeen appropriatelydisclosed.


(k) particulars of anyliability of a contingentnature.

: Furnish the detail ofcontingent liabilitiesdebited to the profit andloss account indicatingthe nature of the demandand the reasons formaking provisions in theaccounts.

Review the audited

accounts, in particular thenotes to the accounts toensure that all liabilities ofa disputed nature havebeen identified for furtherdiscussion.

Note : As per the ICAI theseare normally expensesconnected with disputedclaims which will be revealedonly on the basis of thescrutiny of correspondencerelating to cases pending in

a court of law.

(l) amount of deductioninadmissible in termsof section 14A inrespect of theexpenditure incurred inrelation to incomewhich does not formpart of the totalincome.

i) Go through the returnfiled and assessmentorder for last 2 to 3 yearto verify details andcategories of exemptincome.

ii) Obtain managementrepresentation as toincome which it is goingto claim as exempt inthis year.

iii) Go through theexpenses disallowed inthe earlier year.

iv) Obtain details of expenses pertaining toexempt income such asinterest on fundsborrowed, personal cost,rent, traveling and otheradministrative cost.

v) In case there are nodirect expenses thendisallowance has tobe worked out as perRule 8D.

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vi) If adhoc expenses arestated then givenote/disclaimer.

vii) In case of companyhaving undertaking ofthe nature of 10A/10B/10C then theappropriate note begiven disclosing bothincome and expenditureas per the Audit Reportissued u/s 10A/10B.

(m)amount inadmissibleunder the proviso tosection 36(1)(iii).

(a) Obtain detailsof fixed asset which areacquired by borrowingloans.

(b) In case of funds of C/C accountused and which cannotbe correlated determineinterest cost as per AS-16.

18

Particulars of paymentsmade to persons specifiedunder section 40A(2)(b).

: Obtain a schedule fromthe client indicating thefollowing:

- List of personsspecified undersection 40A(2)(b)

- Details of paymentsmade to personsspecified in abovelist.

Agree the schedule with ;- Relevant contracts/

agreements withspecified persons.

- Relevant supports forpayments made to

such specifiedpersons.

Review the relevantaccounts to identify anypayments made topersons specified undersection 40A(2)(b).

Compare the detail shownunder Tax Audit with theRelated Party Schedule ofIGAAP.

Obtain management

representation.

Notes :

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(i) Salaries andperquisites etc paid todirectors or persons

having substantialinterest in the companyshould be included inthe list referred toabove.

(ii) Sincedisallowance in thiscase is at the discretionof the Income TaxOfficer the totalamount paid to suchpersons should beindicated in theschedule.

(iii) As per the ICAI, inthe case of a largecompany, it may not bepossible to verify thelist of all personscovered by this sectiontherefore theinformation supplied bythe assessee can berelied upon. It hasfurther stated that it

may be difficult toidentify all payments ineach and every casewhere the volume oftransactions is ratherhuge and voluminous,and therefore, it maybe necessary to restrictthe scrutiny only tosuch payments inexcess of certainmonetary limitsdepending upon the

size of the concern andvolume of the businessof the assessee.

(iv) Suggesteddisclosure where theinformation is notavailable with client isas follows :

The company does nothave necessaryinformation in respectof the following :

(a) directorsand their relatives

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of companieshaving asubstantial interest

in the company;and

(b) any person,in whose businessor profession, thedirectors or theirrelatives have asubstantial interestas defined in theexplanation toSection 40A(2)(b).

19

Amounts deemed to beprofits and gains undersection 33AB or 33ABA or33AC.

: Go through the relevantsections.

20

Any amount of profitchargeable to tax undersection 41 andcomputation thereof.

: Obtain a scheduleindicating amount of profitchargeable to tax underthe aforesaid clause andthe computation thereof.

Agree the details withaudited schedules andother relevant support

documents. Review the relevant

accounts to ensure that allsuch sums have beenappropriately disclosed.


21*

(i) In respect of any sumreferred to in clause (a),(b),(c),(d),(e) or (f) ofsection 43B, the liabilityfor which;

(A) pre-existed on thefirst day of theprevious year but wasnot allowed in theassessment of anypreceding previousyear and was(a) paid during the

previous year;(b) not paid during

the previous

year;

:

Obtain a scheduleindicating the followinginformation in respect ofthe items referred to inclause (a), (b), (c), (d), (e)and (f) of section 43B :

- Liability at thebeginning of the year

- Amount paid duringthe year including thedate of payment

- Amount not paid

during the year Agree the amounts and

dates with audited

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(B) was incurred in theprevious year andwas(a) paid on or

before the duedate forfurnishing thereturn of incomeor the previousyear undersection 139(1);

(b) not paid on orbefore theaforesaid date.

schedules and relevantsupporting documents.

Obtain a schedule inrespect of the itemsmentioned above,specifically indicating thefollowing :

- Liability incurredduring the year

- Amount paid on orbefore the due datefor furnishing thereturn of incomeunder section 139(1)

along with date ofpayment.- Amount not paid on

or before theaforesaid date.

The expenses, which arecapitalized, would also becovered under this clause.

Check that all the figureshown in annexure are inagreement with IGAAP.

In case there is anymismatch of figures with

books of accounts,prepare reconciliation forthe same.

Take the copies of challanto verify that amountspayable as on last day ofthe financial year are paidin subsequent year.

To verify if any conversionof interest into loan orfunded interest has takenplace during the year.

Agree the amounts anddates with auditedschedules and relevantsupporting documents.

* State whether sales tax,customs duty, excise dutyor any other indirect tax,levy, cess, impost etc. ispassed through the profitand loss account.

22

(a) Amount of Modified ValueAdded Tax credits availed

of or utilised during theprevious year and itstreatment in the profit and

: (i) State thetreatment given in the

books to Modvat/ Cenvat.Give details w.r.t.opening balance/ credit

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loss account andtreatment of outstandingModified Value Added Tax

credits in the accounts.

availed/credit used/closing balance of allCenvat account as per

Account books andExcise record withreconciliation.

(ii) Go through thereconciliation and reportthe difference under therespective clause of 3CD.

(b) Particulars of income orexpenditure of prior periodcredited or debited to theprofit and loss account.

: Furnish a detail of income/expenditurerelating to prior periodcredited/ debited to the

profit and loss accountduring the year. Agree the details with

audited schedules andrelevant supportingdocuments.

Review the items underthe head prior periodadjustment and the notesto the accounts to ensureall suchexpenditure/income hasbeen disclosed in the

above schedule. In order to ascertain the

correct meaning of termPrior Period Item referto the text of AccountingStandard- 5 issued byICAI.


23

Details of any amountborrowed on hundi or anyamount due thereon(including interest on theamount borrowed) repaid,otherwise than through anaccount payee cheque[Section 69D].

: Obtain a schedule ofborrowing andrepayments (includinginterest) of hundi loansotherwise than by accountpayee cheques.

Agree the details with theaudited schedules andrelevant supportingdocuments.


Obtain a schedule ofborrowing andrepayments (including

interest) of hundi loansotherwise than by account

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payee cheques.

Agree the details with theaudited schedules and

relevant supportingdocuments.


Note : As per the ICAI in theabsence of conclusive orsatisfactory evidence asuitable comment in thereport as suggested inclause 17(h) shou0ld bemade. : As per the ICAI in

the absence of conclusive orsatisfactory evidence asuitable comment in thereport should be made.

24

(a)*

Particulars of each loan ordeposit in an amountexceeding the limitspecified in section 269SStaken or accepted duringthe previous year:-

:

(i) name, address and

permanent accountnumber (if availablewith the assessee)of the lender ordepositor;

: Obtain a schedule of loans

and deposits of Rs.20,000or more taken or acceptedduring the year giving therelevant details as per theaforesaid clause.

(ii) amount of loan ordeposit taken oraccepted;

: The amount of Rs.20,000/- or more is tobe computed inclusiveof opening Balance inthe party account andfor the purpose ofprepayment also,amount credited as

interest. For the purpose of this

clause, loan/depositwould include, amongothers, the following:a) Security Deposits

from staff, agents,customers with orwithout interest

b) Loans fromfinancialinstitutions.

c) Advance in thenature of loandeposit.

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d) Fixed deposit frompublic.

Agree the details with the

audited schedules andother relevant supportingdocuments.

(iii) whether the loan ordeposit wassquared up duringthe previous year;

: Review the loan, depositand other relevantaccounts to ensure allsuch particulars havebeen appropriatelydisclosed.

(iv) maximum amount

outstanding in theaccount at any timeduring the previousyear;

: Obtain certificate from

management that loansaccepted during the yearand their repayment hasbeen through an accountpayee cheques/draft.

Note :(v) whether the loan or

deposit was takenor acceptedotherwise than byan account payeecheque or an

account payee bankdraft.

: (i) As per the ICAIinformation of each loanor deposit of Rs.20,000or more alone would berequired by this clauseand where each such

loan or deposit is lessthan Rs.20,000 andaggregate aloneexceeds Rs.20,000, theparticulars need not befurnished.

* (These particulars neednot be given in the case ofa Government Company, abanking company or acorporation established bya Central, State orProvincial Act).

(ii) Advance receivedagainst agreement ofsale of goods is not aloan/deposit.

(iii) Loan taken fromfinancial institutions arecovered under this

clause.(iv) Security deposits

against contracts etc.will be covered by thedefinition of `depositand the information forthe same will have to beprovided.

(b) Particulars of eachrepayment of loan ordeposit in an amountexceeding the limitspecified in section 269Tmade during the previous

:

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year :-

(i) name, address and

permanent accountnumber (if availablewith the assessee)of the payee;

: Obtain a schedule of loans

and deposits of Rs.20,000or more repaid during theyear giving the relevantdetails as per theaforesaid clause.

(ii) amount of therepayment;

: Agree the details with theaudited schedules andother relevant supportingdocuments.

(iii) maximum amount

outstanding in theaccount at any timeduring the previousyear.

: Review the loan, deposit

and other relevantaccounts to ensure allsuch particulars havebeen appropriatelydisclosed.

(iv) whether therepayment wasmade otherwisethan by accountpayee cheque oraccount payee bankdraft.

: Obtain managementrepresentation.

Note :i) Refer note (i) to (v)

above.ii) Obtain a certificate from

the assessee asprescribed in aboveclause.

iii) This clause is notapplicable in respect ofloan taken and repaidfrom/to Bank, Govt.,Govt. company.

(c) Whether a certificate hasbeen obtained from theassessee regarding takingor accepting loan or

deposit, ore repayment ofthe same through anaccount payee cheques oran account payee bankdraft (Yes/No)The particulars (i) to (iv) at(b) and the Certificate at(c) above need not begiven in the case of arepayment of any loan ordeposit taken or acceptedfrom Government,

Government company,banking company or acorporation established by

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a Central, State orProvincial Act

25

(a) Details of brought forwardloss or depreciationallowance, in the followingmanner, to the extentavailable :

Obtain a scheduleindicating the details asper the aforesaid clause. The clause will cover thefollowing :

Serial Number - Business loss (Section 72)

Assessment Year - Unabsorbed depreciation

Nature of loss/allowance(in rupees)

- Speculation loss (Section73)

Amount as returned (inrupees)

- Loss under the head capitalgains.(Section 74)

Amount as assessed

(give reference torelevant order)

Remarks

Furnish the information as

to when returns of incomefor which the abovebrought forwardloss/depreciation ariseswere filed and whetherthey were filed in time asprovided under section139(1) or late (anyextension granted byCBDT to be indicated).

Agree the basis anddetails with the return ofincome, assessment

orders etc. and otherrelevant supportingdocuments.

If there are differences infigures as per returns filedand as assessed, alsofurnish separatelyreconciliations andwhether matters arepending in appeals and/orrectification or underrevision proceedings, etc.

if appeal is decided butorder giving effect thereofis not received, indicatethe same.

Take the copies of allrelevant orders.

(b) Whether a change inshare-holding of thecompany has taken placein the previous year due towhich the losses incurredprior to the previous year

cannot be allowed to becarried forward in terms of

In case of all unlistedcompany to see whetherthere was any change inshareholding affecting thebenefit of C/F loss (Section79).

Details of shareholding beobtained at the end of 31st

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section 79.

March of all the yearsupto 31st March 2006 toverify whether 49% or

more shareholding haschanged during the periodfrom the year for whichloss is carried forward andupto 31st March 2006.

Any change inshareholding on accountof death of a shareholderor gift by the shareholderto the relative and as persecond proviso (applicablein case shareholder is a

foreign holding company)be ignored.

26

Section-wise details ofdeductions, if any,admissible under ChapterVIA.

: This is an exhaustiveclause to cover all eligibledeductions availableunder chapter VI-A ofIncome Tax Act, 1961.

Obtain a scheduleindicating the section-wisedetails of deductionsclaimed under ChapterVIA.

Ensure that deductionsclaimed by the client areadmissible under ChapterVIA.

Agree the details with theaudited schedules andother relevant supportingdocuments.

If the assessee is claimingdeduction under aparticular section for thefirst time, furnish a notegiving reasons as to howthe assessee is qualifiedfor such a deduction withdue evidence and that theassessee has compiledwith all the conditions laiddown in the relevantsection. (with thenecessary documentaryevidence).

Review assessmentscompleted/ prior year taxreturns to examine the

basis adopted in earlieryears.

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Verify the basis andcomputation of deductions.


ImportantIn case any report u/s 80IA/80IB or any other section ofchapter VIA is issued by anyother Chartered Accountantthen go through the same toverify whether the amountarrived is in accordance withthe Provisions of therelevant Section.

27

(a) Whether the assessee hascomplied with theprovisions of Chapter XVII-B regarding deduction oftax at source andregarding the paymentthereof to the credit of theCentral Government(Yes/No)

: Obtain a scheduleindicating the details asper the aforesaid clause.

Agree the details with therelevant supportingdocuments and returnssubmitted for thepurpose.

Go through the quarterlyTDS returns filed.

(b) If the provisions of Chapter

XVII-B have not beencomplied with, please givethe following details*,namely:-(i) Tax deductible and not

deducted at all(ii) Shortfall on account of

lesser deduction thanrequired to bededucted

(iii) Tax deducted late(iv) Tax deducted but not

paid to the credit ofthe CentralGovernment

Please give the details ofcases covered in (i) to (vi)above.

Review the relevant

accounts to ensure thattax has been deducted asper XVII-B e.g. salaries,interest on securities,other interest, dividends,royalties, payments tonon-residents, paymentsto contractors and sub-contractors etc.

Above detail should alsoinclude particulars of taxdeducted in the financial

year but paid to the Govt.in subsequent year. Report cases where TDS

has not been deducted ordeducted at lesser ratesthan applicable.

TDS is required to bededucted on thecomponent of service taxalso.

Important note regardingTax Audit

Scrutinize balancesappearing at the end of the

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period of the followingaccount heads carefully:1) Provision for

expenses.2) Outstanding

liabilities.3) Bill adjustables.4) Other liabilities or

any other accountopened in books which issimilar in nature toabove. The above accountsnormally comprise ofcredit entries pertainingto provision for expensesmade. Such expensesmay fall into followingcategories:

a) Governmenttaxes and statutorydues.b) Staff payments.c) Expensesliable to TDSdeduction.d) Other items.

i) Governmenttaxes andstatutory dueshave to bereported u/s 43B. This clause willalso include bonusand incentive tostaff by variousname called.

ii) Theexpenses whichare liable to TDS

are to be reportedin the TDS clause(in case of defaults) and alsosimultaneously inclause 17(l) of taxaudit report to theextent applicable.

iii) Furthersometime theinterest payableto parties is alsoincluded in the

above head whichis liable to TDS.

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iv) For CAROpurposes onemust go through

the tax auditreport of last yearand if items whichwere liable toTDS are reportedbut the TDS hasnot beendeducted andpaid till 31st Marchthen the same willhave to bereported in CAROalso.

28

(a) In the case of a tradingconcern, give quantitativedetails of principal items ofgoods traded:

(i) Opening stock;(ii) Purchases

during theprevious years;

(iii) Sales during theprevious year;

(iv) Closing stock;

(v) Shortage/excess, if any

:

:

:

:::

Obtain a scheduleindicating the details asper the aforesaid clause.

Agree the details withaudited schedules and thestock records maintainedby the company.

Review the relevantaccounts to ensure allsuch particulars havebeen appropriately

disclosed. Furnish the reasons for

short/excess with properexplanation and statewhether it is normal orabnormal as per industrystandards.


(b) In the case of amanufacturing concern,give quantitative details ofthe principal items of rawmaterials, finishedproducts and by-products:

:

A. Raw Material :(i) Opening Stock;(ii) Purchases

during theprevious year;

(iii) Consumptionduring theprevious year;

(iv) Sales during the

previous year;(v) Closing stock;(vi)* Yield of finished

Furnish details as required.

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products;(vii)* Percentage of

yield;

(viii)*Shortage/excess, if any.

B. Finished products/By-products :

(i) Opening Stock;(ii) Purchases

during theprevious year;

(iii) Quantitymanufacturedduring theprevious year;

(iv) Sales during theprevious year;

(v) Closing stock;(vi) Shortage/excess

, if any.

Furnish details as required.

* Information may be givento the extent available.

29

In the case of a domesticcompany, details of tax on

distributed profits undersection 115O in thefollowing form:-(a) Total amount of

distributed profits;(b) total tax paid

thereon;(c) dates of payment

with amounts.

: Furnish the date of payment of tax on

dividend with the copiesof receipted Challans,showing the date, amountand name of the bank.

Agree the details referredto the audited schedulesand relevant supportingdocuments.

30

Whether any cost auditwas carried out, if yes,enclose a copy of the

report of such audit [Seesection 139(9)].

: Check if cost audit isapplicable; check whetherthe audit has been carried

out during the year. If the Cost audit is not

carried by the time TaxAuditor gives the report,state the fact accordingly.

Obtain a copy of thereport if any cost auditwas carried out during theyear.


31 Whether any audit wasconducted under theCentral Excise Act, 1944, if

: Enquire & obtain LOR andcopy of report of auditconducted by Excise

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yes, enclose a copy of thereport of such audit.

department.

32

Accounting ratios withcalculations as follows :-(a) Gross Profit/Turnover;(b) Net Profit/Turnover;(c) Stock-in-

trade/Turnover;(d) Material

consumed/Finishedgoods produced.

: Obtain a scheduleindicating the aforesaidratios.

Verify the schedule forarithmetical accuracy andcalculations.

Give details of any changeon the basis of calculations of ratio ascompared to thepreceding year.

Agree the values used for

calculating the ratios tothe audited schedules andrelevant supportingdocuments.

As differentinterpretations arepossible of the items likegross profit, net profitetc., it is recommendedthat a note explaining thebasis adopted by thecompany be provided.

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